Mortgage rates are rising. Does that mean it's time to refinance?
About 85% of you just shuddered at the thought of refinancing as rates climb. Hear me out.
Yes, chances are the vast majority of homeowners who could have benefited from refinances already have. They lowered their rate, shortened their term, got cash out, made their repairs and/or upgrades or leveraged their asset to build a portfolio. But there is a contingent of homeowners out there who could still refinance, they just don't know it. They may have had bad credit at the time due to a job loss, divorce or some other event, but now they're a bit more stable so it's something that should be on the table. Maybe you never thought of it or just never had the time, and now you do. If any of these scenarios apply to you, you may want to look into refinancing.
Do you have an adjustable rate mortgage (ARM)?
If you do, you may want to consider refinancing. If you're going to own your property beyond the adjustment period, it's likely that your future payment will be higher than what you could secure now. You may increase your payment by refinancing now, but you may lock in a lower payment compared to what you could see in the future.
Look at the index your ARM is tied to and the adjustments. If you cannot calculate the payment on your own, contact a mortgage specialist for help. It's anticipated that rates are going to continue to rise. The Fed has said as much this year and they've kept their promise. They have two more meetings left this year, one in September and the last in December. Expect rates to start to climb in the weeks prior as investors start to build in the expected rate increase.
Do you have a home equity line of credit (HELOC)?
If you do, you may want to consider refinancing. Most HELOCs have an interest-only period (generally 10 years), which is the payment that most people make. Like an ARM, HELOCs are also tied to an index, generally Prime. Depending on the balance of your HELOC, slight increases in the index could mean hundreds if not thousands of dollars over the interest only, and in turn, repayment period once you enter it and the loan begins to amortize.
Rising rates have an impact across the board on market indices. You could be looking at a much higher payment in the future if you're inactive now.
Do you have a second mortgage (not a HELOC)?
If you do, you may want to consider refinancing. A second mortgage is fixed, unlike a HELOC which is adjustable, so you're not at risk of the second payment increasing. However, if the rate on your second mortgage is higher than you're comfortable with (which it generally is) then you may want to look at combining your first and second mortgages into one loan.
Do you have repairs, updates or renovations to make?
If you do, you may want to consider refinancing. With rates climbing, it could cost you more to make those repairs in the future if you planned on tapping into your equity. The tricky part of that is you may not have the equity to pull from right now. You may want to look at alternatives to financing those improvements or just save up the old-fashioned way.
Do you think the stock market will continue to rise, and if so, do you have access to funds to invest?
It's imperative to discuss this with your financial planner. If you think the market will rise but you don't have access to funds, you may want to consider refinancing. It's generally not advised to use your home as an ATM, so consulting your financial professional on this is a wise decision. Just like your lender should, your financial planner will look at the big picture. If it makes sense, it makes sense; if it doesn't, it doesn't. At least you've explored the option and didn't let an opportunity pass you by.
Despite interest rates increasing, there are still reasons to refinance. It isn't as enticing as it was a few years ago, but that doesn't mean it still isn't a good decision.
